States demand widening the divisible pool of resources to include cesses or surcharges, or alternatively, replacing them with tax levy to ensure that the states get a share of these revenues

In a pre-budget meeting with finance minister Arun Jaitley, some states have sought relaxation of borrowing targets under the Fiscal Responsibility and Budget Management Act. Photo: Abhijit Bhatlekar/Mint

New Delhi: States on Thursday sought greater fund allocation from the centre for key government schemes and freedom to borrow more to overcome revenue shortfalls in the aftermath of demonetisation and roll-out of the goods and services tax (GST).

In a pre-budget meeting with the Union finance minister and finance ministry officials on Thursday, states demanded widening the divisible pool of resources to include cesses or surcharges, or alternatively, replacing these cesses and surcharges with tax levy to ensure that the states get a share of these revenues.

The Union budget, presented by finance minister Arun Jaitley on 1 February, will be the first budget after the roll-out of GST. It is also the last full budget of the National Democratic Alliance government and is expected to address rural distress, job creation and ways to accelerate economic growth.

Some states sought relaxation of borrowing targets under the Fiscal Responsibility and Budget Management Act, arguing demonetisation and GST have affected their revenues. Expenditure of states is also likely to shoot up as they look to implement recommendations of the 7th Pay Commission.

“The double whammy of demonetization and GST has seriously affected the finances of the state... Recent pay revision has also put additional burden on state exchequer,” said Kerala finance minister Thomas Isaac. “The existing borrowing allowed as 3% of GSDP is insufficient to meet actual requirements. Hence, it is necessary that open market borrowing during 2018-19 may be allowed as 3.5% of GSDP as a special case,” he said.

States will be compensated for any shortfall in revenues arising from a transition to GST against revenues accruing in the value-added tax regime. However, states are arguing that a slowdown in real estate has affected revenues from stamp duty and registration fee—resources which will not be compensated by the centre.

States also sought greater central funding for centrally sponsored schemes. The centre had reduced its share in these schemes to 60% from 75%, arguing that states are now getting a larger share of central taxes at 42% against 32% earlier.

The overall financial health of many states suffered due to implementation of Uday, the bail-out package for state power distribution companies, which raised their debt levels, although it is not counted in state fiscal deficit. States demanded funds for specific infrastructure projects and sought special dispensation for locally relevant industries.

Tamil Nadu deputy chief minister O. Paneerselvam said the centre’s decision to reduce its funding share in centrally sponsored schemes is squeezing state finances. He also pointed out that there is a huge backlog for release of funds by various central government departments.